Victorian Transmission Investment Framework Preliminary Design

Fast Facts.

• On 1 July 2022, the Victorian Government commenced consultation on the Victorian Transmission Investment Framework (VTIF) Preliminary Design, proposing a new framework for how transmission infrastructure, with particular regard to renewable energy zones (REZs), is planned and developed. Submissions close 15 August 2022. 

• Victoria’s current transmission planning is undertaken by the Australian Energy Market Operator (AEMO) and most grid expansion projects are subject to the Regulatory Investment Test for Transmission (RIT-T).  

• The Victorian Government considers that complexities associated with the energy transition require greater planning certainty for how renewables can support and be integrated into the grid. 

• The VTIF proposes an approach to delivering Victorian transmission and REZs, including the consideration and development of an Optimal REZ Pathway for the timely co-ordination of investment in transmission, generation and storage infrastructure. The proposed framework also seeks to better integrate land use considerations, environmental impacts, and community views (and benefits) into the planning process. 

• Consultation documents provided for the VTIF consultation include: Victorian Transmission Investment Framework: Preliminary Design Consultation Paper (as well as a Summary for Communities); and Options Paper: Access for Victorian REZs 

• The VTIF would identify an ‘optimal REZ pathway’ for transmission in and outside REZs on time over a planning horizon of 25 years on a four-yearly cycle. 

• VicGrid will be holding an industry workshop and a series of stakeholder briefings across July and August 2022. VicGrid will also hold a series of regional briefings to consult with directly impacted stakeholder groups within each REZ during this time. A report will be published to summarise stakeholder feedback from the workshops and submissions to the Consultation Paper in late 2022. 

• The VTIF is part of a trend in states taking control of planning and implementation of transmission (and in part generation) delivery in the NEM. Generators and investors are likely to be attracted to the certainty these arrangements can offer as compared to potential national reforms that depend on the votes of Energy Ministers.   

Background

Victoria’s energy system, much like other energy systems around Australia, is experiencing rapid structural change. Coal-fired power stations are reaching the end of their technical life or are becoming uneconomic, with many projected to close significantly sooner than anticipated. Yallourn power station is scheduled to retire in 2028, representing around 14 per cent of Victoria’s generation capacity, and the Australian Energy Market Operator (AEMO) has projected that Loy Yang A and B, the State’s other coal-fired power stations, are likely to exit the market as early as 2032. While these closures would bring Victoria closer to its net zero emissions by 2050 target, these plants represent a major part of Victoria’s current electricity supply.  

Renewable Energy Zones  

The Victorian government has stated that developing REZs is central to Victoria’s response to changes in its energy system, and that transmission is the key enabler. Victoria’s renewable energy resources are dispersed across many areas that are not well-served by its existing grid.  

REZs provide an opportunity to better coordinate transmission, generation and storage in a cost-effective manner.  

What is the problem identified with current transmission planning in Victoria? 

Current transmission expansion planning in Victoria is undertaken by AEMO in its Victorian Transmission Network Services Provider role as a planner and procurer of transmission. Under the National Electricity Rules (NER), most grid expansion projects are also subject to the RIT-T and a competitive procurement process (for projects greater than $10 million). The Consultation Paper highlights that these arrangements were not necessarily designed for major changes in generation sources, size or location and provide limited support for strategic, anticipatory transmission investment. The current energy landscape may benefit from a new approach to planning that can deal with complexities and anticipates future trends. 

Features of the Victorian Transmission Investment Framework 

The staged aims of the VTIF are to, ‘create an integrated and targeted approach to transmission and REZ development that fosters community support and renewable infrastructure investment’. It is led by objectives and an approach focused on ensuring secure, affordable and reliable electricity, while delivering infrastructure in a timely, coordinated, transparent, inclusive, and equitable manner.  

To facilitate the stated objectives and approach, the VTIF comprising five key elements: 

1. A new planning process for planning and developing the transmission infrastructure (comprising seven stages – refer below); 

2. Introducing new access arrangements that support investment; 

3. Basing transmission and REZ development on early, inclusive and ongoing community engagement; 

4. Introducing benefit sharing arrangements that enable better outcomes for local communities; and 

5. Identifying clear roles and responsibilities for VicGrid (a division within the Department of Environment, Land, Water and planning (DELWP) created to lead the delivery of REZs). 

The VTIF would only apply to future Victorian transmission developments that are identified through the Optimal REZ pathway and would not apply to projects that have already commenced the regulatory process.  

It is envisaged that the outputs of the VTIF would be fed into AEMO’s subsequent Integrated System Plan (ISP). Similarly, outputs from ISP processes will be incorporated into the development of Victoria’s Optimal REZ Pathway (discussed below).  

Key Issues

VTIF Planning Process 

The proposed VTIF planning comprises seven stages, including: 

1. System scenarios (new for consultation) - develops plausible energy futures over the next 25 years given major sector trends and Victorian policy, including net zero emissions by 2050; 

2. Candidate REZ pathways (new for consultation) - prepares a set of candidate options for building out Victoria’s transmission grid to meet different energy futures; 

3. Optimal REZ Pathway (new for consultation) – Develops Victoria’s optimal transmission pathway to provide for REZ development involving a cost-benefit analysis and optimal REZ pathway analysis; 

4. REZ transmission projects (new for consultation) – identifies the transmission projects that most efficiently meet the Optimal REZ Pathway, involving Victorian Network Investment Tests and procurement. Updating contestability arrangements will also be a part of this stage; 

5. Approvals (no proposed changes) – transmission provider seeks planning and environmental approvals required under relevant legislation; 

6. Delivery (no proposed changes) – transmission provider delivers the project in accordance with contract terms and conditions; and 

7. Review (no proposed changes) – annual review and re-run of the process every four years to ensure planning is consistent with emerging developments. 

Should the Government proceed with the proposed VTIF, a new legislated objective for transmission planning in Victoria would be required. The VTIF Consultation Paper outlines a draft Victorian Transmission Planning Objective: ‘to promote efficient investment in, and efficient operation and use of, electricity transmission services for the long-term interests of Victorian consumers of electricity with respect to: 

• Price, quality, safety and reliability and security of supply of electricity 

• The reliability, safety and security of the national electricity system  

• The orderly transition of the Victorian electricity system, consistent with the commitment to net zero emissions by 2050 

• The delivery of transmission, consistent with a least regrets development pathway’. 

Introducing new access arrangements that support investment 

The Victorian Government is considering whether improvements can be made to current access and pricing arrangements to incentivise new connections in Victoria’s REZs. Providing an attractive investment environment to support Victoria’s transition to renewables is also a motivator. 

The Consultation Paper notes that while the Victorian Government supports potential Energy Security Board (ESB) pricing and access reforms, but that  implementation is uncertain. Victoria is considering options to change the existing access regime to a physical access model, or a financial access model, with potential for competitive allocation of access rights.   

The most appropriate access option will be determined by the Victorian Government, with the decisions to be informed by feedback to the Consultation Paper.  

Basing transmission and REZ development on early, inclusive and ongoing community engagement 

Considering impacts on regional communities is a core aspect of the VTIF’s proposed new structures and procedures, with local engagement being highlighted as a key enabler for understanding potential community impacts.  

A range of stakeholders have displayed a clear desire to see greater engagement through the transmission infrastructure planning process, particularly through early and ongoing involvement in the planning and investment process. As such, the proposed VTIF aims to engage local communities, Traditional Owners and regional stakeholders through the embedment of local engagement and land use assessments into REZ planning and development. 

The proposed framework includes new tools and approaches to engagement including a new Strategic Land Use Assessment (SLUA) and Multi-Criteria Analysis (MCA) to assess the suitability of developing electricity infrastructure relative to social, environmental, technical, and commercial merits of the REZs.  

Introducing benefits-sharing arrangements 

The VTIF may also introduce arrangements to share the benefits of construction and operation of new infrastructure with local communities, for example to bolster employment opportunities, training and skills development, and local economic activity.  

Consideration is being given to how the VTIF can best integrate benefits sharing into regulatory arrangements, including through: 

• Generation obligations in return for ‘access’ rights to use REZ infrastructure; 

• Transmission selection criteria, which includes benefit sharing criteria when assessing transmission projects (procurement); and 

• Funding from a mix of generation & transmission to help deliver local and regional benefits at a broader scale. 

Identifying clear roles and responsibilities for VicGrid 

Should the Victorian Government proceed with the proposed VTIF, it is proposed that VicGrid would perform the additional functions set out under the Framework, including but not limited to: 

• Developing the system scenarios; 

• Identifying the candidate REZ pathways, including undertaking the SLUA and MCA; 

• Identifying the Optimal REZ Pathway; and 

• Administering access rights in REZs. 

Functions that are currently the responsibility of AEMO, Victoria’s transmission planning body, are also contained in the VTIF: 

• Applying the efficiency test; 

• Identification of specific transmission projects; and 

• Procurement of the related projects. 

However, further consultation and engagement with AEMO and other stakeholders is required to determine how new functions would operate in conjunction with existing TNSP functions. 

Our Insights

State based planning and development 

The VTIF is part of a bigger trend in which states are exercising their constitutional powers for the planning and implementation of transmission (and in part generation) delivery in the NEM. It is very similar to the Electricity Infrastructure Roadmap implemented by the NSW Government to fast-track several Renewable Energy Zones, as well as the recent investment by the Queensland government in REZ transmission infrastructure.  

Significantly, these schemes do not signal a wish by NEM jurisdictions to break away from the NEM entirely – this would be highly impractical – instead these schemes mesh with the Integrated System Plan process, while allowing individual states to pursue their own energy objectives at their own pace. NSW and Victorian have signalled they are not willing to wait for the ISP to signal the need for transmission to allow less emissions intensive generation to enter the system, but are actively seeking to attract investment (potentially to the detriment of other states) in renewable generation to reduce emissions, and hedge against accelerated coal closures. 

For investors this movement towards a state-based planning function represents challenges as differing regulatory frameworks emerge across the NEM. These all have broadly similar objectives, but varying approaches to planning, access rights and incentives. Taking access rights as an example –Victoria is consulting on three options for potential application, a Physical Access Model, Financial Access Model, or retaining the current Open Access Regime – each of which provide different degrees of certainty of access and conditions. Meanwhile, NSW and QLD are both prioritising a Physical Access Model where access arrangements provide generators (and potentially also storage) with a degree of certainty of network access by imposing physical limits on the total capacity of assets which can connect into a REZ.  

So why the difference? Simply, each state faces different challenges compared to each other, particularly where Victoria has an abundance of brownfield developments with existing transmission and network infrastructure and generation, compared to new build Greenfields in NSW and QLD. Similarly, while each state is anticipated to have REZs with a range of network topologies, NSW and QLD are less characterised by meshed topologies than Victoria, and are likely to have REZs with simpler topologies (i.e., less meshed with the surrounding network or interconnectors). These differences mean policy reforms will be bespoke across states as different priorities emerge. 

Relationship with the ISP  

For incumbent transmission network service providers and prospective generators, there is a fundamental question as to the relationships of the REZ schemes with the ISP, and the potential for circularity across NEM and State-based planning processes. Colloquially, what comes first, the chicken or the egg? Or in this context, the ISP or the relevant state planning framework?  

There is no doubt the speed of state development is beginning to re-align the ISP's optimal development path for development – this risks the undoing of benefits associated with early works for major transmission required under the ISP, and the potential of benefits of interconnection projects – a potential concern for incumbent generators and TNSPs. 

Relationship with national reforms 

For prospective generators and investors, there is an obvious question about how these new state arrangements will interact with existing NEM regulatory arrangements, and transmission related reforms (i.e., the Transmission Access Reform and Transmission Planning and Investment Review). State ministers are well aware of the challenges in national decision-making (by Energy Ministers) where a unanimous vote is required. While Victoria has signalled it is not averse to seeing through the ESB access and pricing reforms, it is hedging its bets to avoid being set back by division between other states or the Commonwealth. State based solutions offer more certainty, and for that reason, jurisdictions that implement such bespoke arrangements may be more attractive to investors. But, as noted above, it is critical that regulatory arrangements are well understood to avoid unintended outcomes. 

For more information, contact Simone Rennie at srennie@renniepartners.com.au

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